There are all kinds of parents: parents raising young children, parents of teenagers, parents of college students, parents who have become grandparents, and parents who have lived to see their great-grandchildren. We’d need several volumes to provide advice to parents of all ages about buying insurance, so we’re going to concentrate on parents of kids 0 to 18, which covers kids from birth to college.
There are many different types of insurance parents need to buy during these years, and we’re going to focus on five of them:
- Property and Casualty (Auto and Homeowners)
- Long-term care
In this guide, we’re not going to address cost in great detail, but we will touch on it. We’re primarily going to concentrate on the quality of coverage since the price is of secondary concern when you have a claim to file.
Life insurance is the first type of insurance we’ll cover because it’s the first type of insurance people tell you to buy when you’re a newlywed or a new parent. From well-meaning parents to eager life insurance agents, just about everyone will tell you that the responsible thing to do as a parent is to buy life insurance. It may not be the most important coverage you’ll buy as a parent, but it’s fitting that parents have it in place.
While most people will agree that responsible parents own life insurance, they won’t all agree on the kind of life insurance you should own. Whole life, universal life, variable life, variable universal life, term life, burial insurance...the list is long. Let’s look at the two primary categories of life insurance: permanent life insurance and term life.
Permanent life insurance
Permanent life insurance is the life insurance that insurance companies and agents love to sell. The reasons: high priced premiums and big commissions. This is not to say that permanent insurance doesn’t have its place, but probably not if you’re young and healthy.
Permanent life insurance is meant to be used, as its name implies, as permanent protection against financial loss for someone when you die. One type of permanent insurance, whole life, exemplifies it best; you keep it for your whole life.
In addition to providing your family with a death benefit when you die, permanent life insurance policies also accumulate cash value, which can be compared to a savings account. A portion of each premium payment you make pays for the cost of life insurance, and a portion goes into the cash-value account, which earns interest or dividends if it’s a whole life policy.
Many people buy permanent insurance because they like the savings element of the policy and the fact that the cash value can be withdrawn or borrowed as a low or no-interest loan. While providing protection so your spouse and children can stay in their home with a lifestyle comparable to that which they enjoyed when you were alive, the policy can also provide cash later on in life to supplement your retirement savings or have money available to help with college costs as the kids get older.
Term Life Insurance
You may have heard someone say, “Buy term and invest the difference.” The reason? Term life insurance is much less expensive than a permanent policy when you’re younger and raising kids. You can use the difference in premium to put into your 401(k) or IRA and earn a better rate of return than you can through the cash value of a permanent life insurance policy.
Term insurance is exactly what it say’s — it’s life insurance you keep for a specific term or period of time. Most term policies are sold as annual renewable term, with premiums increasing every year you get older, or term insurance with level premiums for 10, 20, or 30 years. Term insurance is great to cover a financial obligation you have for a certain period of time, like when your kids are young or you have a 30-year mortgage you want to be paid off if you were to die.
The cost difference is substantial. For example, a whole life policy for a 35-year-old nonsmoking male from a top-rated insurance company with a death benefit of $300,000 would cost about $7,000 per year. In contrast, a term policy for the same man with the same death benefit would cost approximately $600 per year.
You need health insurance as a parent to ensure that you and your family get good medical care when a family member becomes sick or gets injured. There’s a good reason why you carry your health insurance card with you wherever you go — you never know when you’re going to need it. When your child needs their appendix removed or they fracture an arm from falling off their skateboard, you want them to get the best care possible. Health insurance helps that happen.
Another very good reason to have a comprehensive health insurance plan is to protect you financially against the incredibly high cost of medical care. The appendix removal could easily cost you over $15,000 for a hospital stay of just a couple of days, and if the broken arm is a compound fracture – hospital and doctor bills could easily surpass $5,000.
Each year over 500,000 bankruptcies are filed because of debt accrued from unpayable medical bills. Good health insurance protects against financial calamity.
This is probably the most overlooked of all the types of insurance parents need. If you need life insurance because people depend on you, you probably need disability insurance even more.
At its core, disability insurance provides you a paycheck when you’re unable to earn it. Many families in America live paycheck to paycheck, and missing just one can make for hungry kids and the real possibility of living on the streets. Employers aren’t known for paying employees out of the goodness of their heart when they have a heart attack or cancer and can’t work for months.
If your employer offers group disability insurance as an employee benefit, take advantage of it. Statistically, when you’re raising kids, you’re more likely to become disabled and miss paychecks than you are to die. Insurance is to protect against worst-case scenarios, so get as much coverage as you can at lower group rates.
If you work for a company that doesn’t offer group disability coverage, or if you’re self-employed, purchase an individual disability insurance policy. Depending upon your age and occupation, they’re not inexpensive, but they’re a much better alternative than going without a paycheck for six months or longer.
And, don’t plan on Social Security Disability Insurance (SSDI) being a potential solution. You’ll need to be unable to perform ANY job to qualify, and it takes a minimum of six months before you’ll ever see a dollar in benefits. You’re better off pretending it’s not there.
Auto and homeowners insurance may be the most challenging to figure out and buy because you do it so rarely, and there are so many decisions to make when you do buy it.
The topic can’t be given justice in this article; it’s a topic that deserves its own space. But, here are three tips to buying automobile and homeowners insurance that can save you money and potential headaches:
- Don’t skimp on policy limits. When you get quotes, you might be tempted to go with lower coverage limits to save some money on premiums. Keep in mind that if you have low limits of coverage and you have a big claim, you’re putting yourself and your family at significant risk financially. Spend the extra, and you’ll potentially end up saving money if your coverage is needed.
- Select a higher deductible. You may have spent more upfront taking higher policy limits, but you’ll have lower premiums by choosing a high deductible. For example, going with a $1,000 deductible can save you as much as 35% over a $250 deductible. If you have a good driving record, you can get more favorable rates that will cover your higher deductible if you keep the policy for a reasonable period. You’ll be self-insuring, which is a wise choice if you can do it.
- Go with a top-rated company. You’ll be happy you did if, or when, you have a claim. A quality auto insurer isn’t going to nickel and dime you to death when you’re having bodywork done on your car after a collision, and they’re not going to raise your rates to an un-payable amount after you file a claim. Go online, read reviews, and research the companies you’re considering.
If you’re a parent with school-aged children, there’s a chance you’re not ready to begin investigating long-term care insurance for yourself. And your parents may still have a level of vim and vigor that has thoughts of them living in a nursing home far from your mind.
But, long-term care (LTC) insurance helps more aging adults outside of nursing homes than it does inside them. The American Association for Long-Term Care Insurance reports that over 7.5 million individuals currently receive care at home because of acute illnesses, long-term health conditions, permanent disability, or terminal illness. That is a substantially larger group of people than the 1.8 million individuals in nursing homes.
Home care is expensive and getting more costly every year. The annual cost of long-term care is expected to more than triple over the next few decades, costing over $200,000 per year for a home health aide. Many adults will have to deplete personal savings and retirement accounts to pay for care, making LTC an intelligent investment in your parent’s future safety and independence.
This guide is meant to be a jumping-off point for you if you’re a parent. Insurance is all about protecting you and your family financially in the event of a loss. Talk with reputable agents that specialize in the type of coverage you’re buying. Few property and casualty agents understand the intricacies of disability insurance. Get expert advice from an expert. It’s worth the time and effort.
Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.